In this complete beginner’s guide written to suit all readers, we answer the golden question, ‘What is Blockchain?’.
We will explain the core concept of blockchain technology, the advantages, and disadvantages it offers, its biggest use cases, and how it is transforming the way some of the world’s largest industries operate.
To begin, let’s jump back to where it all really started to begin – the year of 2009.
A Basic Introduction to Blockchain
Founded in 2009 by ‘Satoshi Nakamoto’, Bitcoin was the first system to use blockchain technology. Bitcoin is a digital payment system and cryptocurrency which allows users to send peer-to-peer transactions without any third-party intermediary, such as a bank.
Note: Satoshi Nakamoto is a pseudonym, of which the creator is anonymous. Yes, this being is a ninja. He/she/they created Bitcoin and are still unknown to this day.
Having introduced blockchain technology to the world, the Bitcoin blockchain consists solely of Bitcoin transaction records. It is a public database that is shared and upheld by a network of computers (known as nodes). Once an entry is made to the database, it can neither be removed nor edited.
The Core Concept: What is Blockchain?
So, what is blockchain? It’s a public database that uses cryptographic security and is decentralized (it is formed by a distributed network of nodes rather than having one single/central point of operation. This enables it to be completely immutable and trustless.
The major benefits this offers include the absence of a central authority, a central point of failure and a central point of vulnerability. (We’ll simplify this further into the guide).
Essentially, of all the things you should take from the above statement, the most important is the fact that not one single entity has control over the blockchain. Instead, the authority is shared among all computers/nodes on the network.
Of course, not all cryptocurrencies are the same as Bitcoin. Not all cryptocurrencies are built to be used as digital money. More importantly, not all uses of blockchain technology are related to digital money, either.
In fact, as you’ll soon find out, the uses of blockchain technology are practically infinite.
How Does Blockchain Work?
Blockchain is breakthrough technology, that’s for sure. But how does it work?
Allow me to break it down:
1. The blockchain is a global public database.
Imagine a public Excel spreadsheet that everybody can see. Users can remain anonymous but every transaction they make is visible to the rest of the network. For this reason, blockchains are often referred to as pseudo-anonymous.
2. It is decentralized.
The authority of the database is distributed across a network of computers (nodes). The more nodes, the safer the blockchain. For the blockchain to go offline, almost the entirety of the network of nodes must go offline — there is no single/central point of failure.
3. The nodes are tasked with validating the database.
When a record is submitted to the blockchain, it must be verified by the nodes before it can be stored in the database. In the case of Bitcoin’s blockchain, the nodes check that the entry (transaction) is being sent from a user who actually owns the Bitcoin in the transaction.
4. A consensus is required before an entry can be recorded in the database.
To complete the verification, 51% or more of the nodes must agree that the entry is valid. Once they come to a consensus (group agreement) of 51% or more, the entry is verified and stored in the public database.
5. All entries, once verified and stored, are irreversible and tamperproof.
Due to this, the only way a hacker can defraud the blockchain is to make a new, fraudulent entry. The entry still needs to pass a 51%+ consensus to be successful, though.
The only way for a hacker to achieve this is to occupy at least 51% of the nodes in the blockchain so that they can force the nodes to agree and come to a consensus. However, this is usually so expensive, difficult and time-consuming that it deems the hack futile.
This is one of the greatest advantages to blockchain technology — its unrivaled security.
6. The validation is process is also known as mining and is an incentivized task.
As you can see, the consensus that nodes must come to plays a huge part in the mechanics of blockchain technology. It’s fundamental.
It is an incentivized process, though, as the nodes in most blockchains are rewarded with the cryptocurrency that runs on their blockchain. This is because mining/validating requires computational power (and thus electricity), meaning an incentive for the nodes is required.
This process is called mining because the work nodes do to get a reward resembles the work a gold miner does to unearth gold. Instead of being rewarded with shiny new nuggets of gold, cryptocurrency miners are rewarded with freshly minted cryptocurrency!
To learn more about mining, see our What is Cryptocurrency Mining guide.
The Advantages of Blockchain Technology
Next in our What is Blockchain guide, we’ll look at the key benefits that blockchain technology has to offer.
Decentralization & Security
Decentralization is perhaps the most important advantage of blockchain technology. It was a concept that had been discussed for many years, however, only truly became a reality when blockchain technology was born.
Put simply, the blockchain requires no central server to operate. This is largely different to traditional online databases which require central servers to function — just like those of Facebook, eBay, banks, governments, and many other centralized organizations.
Let’s think about Facebook for a moment:
When you sign up and input your personal data, where is it stored? And while we’re at it, where is the location and behavior data stored that Facebook monitor you for? That’s right — it’s all stored on Facebook’s central servers.
The problem is: if these servers are hacked, all data within them is vulnerable. You see, this is because hackers only need to hack one central point (which is Facebook) to gain access to everybody’s data.
If Facebook were using blockchain technology to store their data instead, the hackers wouldn’t get anywhere if they were to hack Facebook alone. Instead, they’d need to hack more than 51% of the nodes in the blockchain. These nodes would presumably be located at lots of different locations all around the world and owned by lots of different individuals, making it near impossible for the hackers to succeed.
The blockchain is a trusted network that removes the need for third-party intermediaries. It allows its users to cooperate with each other in a peer-to-peer fashion without the need of services provided by middlemen who take large fees.
Throughout history, technology has primarily benefited those who own it. For example, the cotton gin benefited the mill owner, not the weaver. The internet promised to democratize technology but has largely fallen into private ownership in much the same way as the printing press or the steam engine did.
Being decentralized, blockchain technology has the potential to deliver on the internet’s original promise and herald an era of development that truly defies central ownership.
Imagine that your family member is in another country and desperately needs some money. Using traditional cross-country payment methods, sending a payment to them would be costly and highly inefficient.
You would have to wait for the bank to confirm the payment, and then for your family member’s bank to confirm the receipt of the payment. This can take 1-5 working days and cost a ton of fees.
However, if you were to make this payment using blockchain technology, it would be sent instantly at a fraction of the cost. This is possible because the only fee payable is one to the nodes/miners, and no third party is involved.
As the blockchain has no central server (it is decentralized), there is no central point of failure. So, even if a node running on the network breaks, there are other computers that will keep the network running. This is a major advantage over traditional technology.
To help get across the importance of this feature, try to imagine a traditional medical server:
This server contains data that is required in the case of a medical emergency. If the server(s) that hold this data were to be hacked or damaged, the data would be inaccessible. This would cause a ton of problems.
However, if the hospital used the blockchain to hold their data, it wouldn’t matter if a node was damaged. This is because the newest version of the data is shared across the entire blockchain, making it accessible at all times.
Next in our What is Blockchain Technology guide, I discuss the industries that blockchain is affecting.
How Blockchain Is Disrupting Industries
To help you understand the advantages of blockchain technology, I have listed below some of the industries encountering problems that could be resolved by implementing blockchain technology.
In the modern world, most data is stored digitally. It allows for much quicker access and helps to prevent environmental problems also.
However, traditional technology is known to have its security flaws when it comes to protecting user data. In fact, over the years, there have been numerous occasions in which cyber attacks have put the average internet user’s private data in jeopardy.
Equifax, one of the largest credit reporting agencies in the world, recently experienced a security breach. This resulted in the data of over 145 million users to be compromised.
However, what the blockchain offers is much more effective when it comes to protecting user data. As aforementioned, the blockchain doesn’t operate on a single server. Instead, it operates on a network managed by a multitude of nodes. So, this makes it near impossible for hackers to steal data and is much more effective than traditional server storage.
There are already several competitors working to resolve this problem by utilising blockchain technology, including the likes of Civic, SelfKey and TheKey. They put your identity in your hands, and keep it out of the hands of organizations.
One of the most crucial industries that blockchain can make a positive impact on is voting. For years, governments have been accused of rigging election results and there is no proof that this isn’t the case.
However, because the blockchain is a public database in which data cannot be reversed or tampered with, trustless elections are finally possible. An election held on a blockchain would:
- Ensure that each person is verified and can only vote once
- Prevent parties from rigging votes in their favor, and prevent anyone else for that matter
- Offer a public database so everyone can see live results as votes are made
Pretty cool, huh?
Banking and Payments
There are many use cases for blockchain in the banking and payments industry. I’ll cover two of them.
First, there are currently over 2 billion people that do not have access to financial services. This means that they don’t have a bank account, making saving and transferring money impossible for them.
What the blockchain offers over traditional banking is the ability to use its financial services without the need for verification. So, those that do not have access to traditional financial services would be able to use cryptocurrencies as a means of payment. This opens up a world of opportunity for them.
Secondly, banks are also starting to implement blockchain technology to improve the efficiency of cross-border payments. Not only would the blockchain make payments cheaper by cutting out all the third parties involved, but it would also make the process much quicker!
In fact, Accenture estimated that large investment banks could save up to $12 billion per year by using the blockchain to make payments.
Like most centralized applications, anti-virus software collects data about its users and utilizes said data to improve its services.
Without your computer’s data, companies like McAfee and Norton wouldn’t have a product to sell and yet the consumer still pays a premium for anti-viral protection.
Blockchain technology would allow you to take complete control of your computer’s data, thus allowing you to monetize it and offset the cost of cybersecurity ie. you’d be selling your data to pay for your computer’s protection!
As with credit and mortgage providers, insurers rely heavily on accurate record keeping.
Imagine insuring a driver; having a complete and unalterable record of a driver’s claims history in a pseudo-anonymous public ledger would vastly increase the speed and accuracy with policies could be issued and claims assessed.
Verifying provenance and accurately tracking goods are hugely important elements in the management of supply chains.
Developments in blockchain technology are allowing companies to more easily check and record the products they use, ensuring quality and reducing waste, as well as limiting corrupt practices.
Blockchain technology offers nation states myriad opportunities given the sheer amount of records and information the governments of the world are charged with securing.
Whether it’s being used for simple admin like the maintenance of birth and death records, the tokenization of gold reserves, or the revolutionary democratization of natural resources.
Blockchains eat middlemen for breakfast, so Amazon had better watch out!
In the States, it’s estimated that the online giant’s e-commerce market share is around 37% and yet it produces next to nothing! A blockchain-based alternative could put the likes of Amazon, Uber and Air BnB out of business entirely by providing the exact same service with none of the markups.
Producers and consumers could be connected directly rather than via a third party. Users of such a network could actually be rewarded for helping to maintain it. Think of it as a global co-op!
Medical records relate to you, but who owns them? Does the patient own information relating to their medical well-being, or does ownership reside with the keeper of the record, ie. the healthcare provider?
Blockchain technology offers a vision of healthcare in which every individual could have complete control over their own records and therefore grant access to them in exchange for tokens or services as well as having more direct involvement in their own remedial care.
The transfer of title deeds and land ownership is an antiquated, slow and costly process, so what is blockchain technology going to do about it?
By establishing the ownership of property on an immutable blockchain, the transfer of said ownership could, in theory, be fully automated by smart contracts, thus reducing paperwork, legal fees and headaches for buyers and sellers alike!
With so many different advantages, you can see that the possibilities are endless!
Conclusion: ‘What is Blockchain’ Round-Up
So, you should now understand the basics of blockchain technology. You might not be an expert (just yet), but you’re certainly one step closer!
Blockchain is a revolutionary technology that’s completely evolving modern-day life as we know it. It has courted more global attention (good and bad) than any other technological development since the advent of the internet itself and its influence is showing little sign of waning. If anything, you can expect this groundbreaking data management system to make increasingly disruptive waves well into 2019 and beyond!
So, what is blockchain technology? It’s something we are super excited about at Tokenleak!
Seriously, what are your thoughts on it, though? After reading our guide, have you formed an opinion of your own? How could blockchain be applied to the industry you currently work in? Be sure to let us know in the comment section!